Question 1

Which of the following statements is correct?

Accepted Answer

A)  According to the unbiased expectations theory, the return for holding a two-year bond to maturity is equal to the nominal rate divided by the real interest rate. 
B)  The rate on a 10-year Corporate bond can never be less than the rate on a 10-year Treasury. 
C)  We usually observe the inverted yield curve. 
D)  The rate on a three-year Treasury can never be less than the rate on a 15-year Treasury. 
A)  According to the unbiased expectations theory, the return for holding a two-year bond to maturity is equal to the nominal rate divided by the real interest rate. 
B)  The rate on a 10-year Corporate bond can never be less than the rate on a 10-year Treasury. 
C)  We usually observe the inverted yield curve. 
D)  The rate on a three-year Treasury can never be less than the rate on a 15-year Treasury. B

Question 2

The Wall Street Journal reports that the rate on three-year Treasury securities is 6.50 percent,and the six-year Treasury rate is 6.80 percent.From discussions with your broker,you have determined that the expected inflation premium will 2.25 percent next year,2.50 percent in year 2,and 2.60 percent in year 3 and beyond.Further,you expect that real interest rates will be 3.4 percent annually for the foreseeable future.Calculate the maturity risk premium on the three-year and the six-year Treasury security.

Accepted Answer

A)  3-year: 0.6 percent, 6-year: 0.80 percent 
B)  3-year: 0.5 percent, 6-year: 0.90 percent 
C)  3-year: 0.6 percent, 6-year: 1.20 percent 
D)  3-year: 0.5 percent, 6-year: 0.80 percent 
A)  3-year: 0.6 percent, 6-year: 0.80 percent 
B)  3-year: 0.5 percent, 6-year: 0.90 percent 
C)  3-year: 0.6 percent, 6-year: 1.20 percent 
D)  3-year: 0.5 percent, 6-year: 0.80 percent D

Question 3

One-year Treasury bills currently earn 3.15 percent.You expect that one year from now,1-year Treasury bill rates will increase to 3.65 percent and that two years from now,one-year Treasury bill rates will increase to 4.05 percent.If the unbiased expectations theory is correct,what should the current rate be on three-year Treasury securities?

Accepted Answer

A)  3.40 percent 
B)  3.62 percent 
C)  3.75 percent 
D)  3.85 percent 
A)  3.40 percent 
B)  3.62 percent 
C)  3.75 percent 
D)  3.85 percent B

Question 4

The Wall Street Journal reports that the rate on four-year Treasury securities is 4.75 percent and the rate on five-year Treasury securities is 5.95 percent.According to the unbiased expectations hypotheses,what does the market expect the one-year Treasury rate to be four years from today,E(5r1)?

Accepted Answer

A)  1.11 percent 
B)  5.95 percent 
C)  10.70 percent 
D)  10.89 percent 
A)  1.11 percent 
B)  5.95 percent 
C)  10.70 percent 
D)  10.89 percent

Question 5

In 20XX,the 10-year Treasury rate was 4.5 percent while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0 percent.What is the average default risk premium on Aaa corporate bonds?

Accepted Answer

A)  0.75 percent 
B)  1.5 percent 
C)  1.95 percent 
D)  2.25 percent 
A)  0.75 percent 
B)  1.5 percent 
C)  1.95 percent 
D)  2.25 percent

Question 6

All of the following are types of financial institutions EXCEPT

Accepted Answer

A)  insurance companies. 
B)  pension funds. 
C)  thrifts. 
D)  Federal reserve 
A)  insurance companies. 
B)  pension funds. 
C)  thrifts. 
D)  Federal reserve

Question 7

When monetary policy objectives are to contract the economic growth,which of the following occurs?

Accepted Answer

A)  The Federal Reserve decreases the supply of funds available in the financial markets. 
B)  At every interest rate the supply of loanable funds increases. 
C)  The supply curve shifts down and to the right. 
D)  The equilibrium interest rate rises. 
A)  The Federal Reserve decreases the supply of funds available in the financial markets. 
B)  At every interest rate the supply of loanable funds increases. 
C)  The supply curve shifts down and to the right. 
D)  The equilibrium interest rate rises.

Question 8

You are considering an investment in 30-year bonds issued by Moore Corporation.The bonds have no special covenants.The Wall Street Journal reports that one-year T-bills are currently earning 3.55 percent.Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate = 2.75 percent
Default risk premium = 1.05 percent
Liquidity risk premium = 0.50 percent
Maturity risk premium = 1.85 percent
What is the inflation premium?

Accepted Answer

A)  0.80 percent 
B)  1.25 percent 
C)  6.25 percent 
D)  8.00 percent 
A)  0.80 percent 
B)  1.25 percent 
C)  6.25 percent 
D)  8.00 percent

Question 9

In the United States,which of these financial institutions arrange most primary market transactions for businesses?

Accepted Answer

A)  investment banks 
B)  asset transformer 
C)  direct transfer agents 
D)  over-the-counter agents 
A)  investment banks 
B)  asset transformer 
C)  direct transfer agents 
D)  over-the-counter agents

Question 10

Suppose we observe the following rates: 1R1 = 13 percent,1R2 = 16 percent,and E(2r1)= 10 percent.If the liquidity premium theory of the term structure of interest rates holds,what is the liquidity premium for year 2,L2?

Accepted Answer

A)  8.7 percent 
B)  9.1 percent 
C)  9.7 percent 
D)  10.0 percent 
A)  8.7 percent 
B)  9.1 percent 
C)  9.7 percent 
D)  10.0 percent

Question 11

A two-year Treasury security currently earns 5.13 percent.Over the next two years,the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year.Calculate the maturity risk premium on the two-year Treasury security.

Accepted Answer

A)  5.13 percent 
B)  3.38 percent 
C)  2.98 percent 
D)  1.23 percent 
A)  5.13 percent 
B)  3.38 percent 
C)  2.98 percent 
D)  1.23 percent

Question 12

Based on economists' forecasts and analysis,one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: Using the liquidity premium theory,what is the current rate on a four-year Treasury security?

Accepted Answer

A)  7.736 percent 
B)  7.600 percent 
C)  7.738 percent 
D)  8.400 percent 
A)  7.736 percent 
B)  7.600 percent 
C)  7.738 percent 
D)  8.400 percent

Question 13

One-year Treasury bills currently earn 3.25 percent.You expect that one year from now,one-year Treasury bill rates will increase to 3.45 percent and that two years from now,one-year Treasury bill rates will increase to 3.95 percent.The liquidity premium on two-year securities is 0.05 percent and on three-year securities is 0.15 percent.If the liquidity theory is correct,what should the current rate be on three-year Treasury securities?

Accepted Answer

A)  3.25 percent 
B)  3.55 percent 
C)  3.62 percent 
D)  4.10 percent 
A)  3.25 percent 
B)  3.55 percent 
C)  3.62 percent 
D)  4.10 percent

Question 14

One-year Treasury bills currently earn 3.75 percent.You expect that one year from now,one-year Treasury bill rates will increase to 4.15 percent.If the unbiased expectations theory is correct,what should the current rate be on two-year Treasury securities?

Accepted Answer

A)  4.25 percent 
B)  3.85 percent 
C)  3.95 percent 
D)  4.35 percent 
A)  4.25 percent 
B)  3.85 percent 
C)  3.95 percent 
D)  4.35 percent

Question 15

The Wall Street Journal reports that the rate on three-year Treasury securities is 4.75 percent and the rate on four-year Treasury securities is 5.00 percent.The one-year interest rate expected in three years is E(4r1),5.25 percent.According to the liquidity premium theory,what is the liquidity premium on the four-year Treasury security,L4?

Accepted Answer

A)  0.0375 percent 
B)  0.504 percent 
C)  5.01 percent 
D)  5.04 percent 
A)  0.0375 percent 
B)  0.504 percent 
C)  5.01 percent 
D)  5.04 percent

Question 16

Suppose we observe the following rates: 1R1 = 8 percent,1R2 = 10 percent,and E(2r1)= 8 percent.If the liquidity premium theory of the term structure of interest rates holds,what is the liquidity premium for year 2,L2?

Accepted Answer

A)  1.02 percent 
B)  4.04 percent 
C)  6.15 percent 
D)  12.03 percent 
A)  1.02 percent 
B)  4.04 percent 
C)  6.15 percent 
D)  12.03 percent

Question 17

Which of these money market instruments are short-term funds transferred between financial institutions,usually for no more than one day?

Accepted Answer

A)  treasury bills 
B)  federal funds 
C)  commercial paper 
D)  banker acceptances 
A)  treasury bills 
B)  federal funds 
C)  commercial paper 
D)  banker acceptances

Question 18

All of the following are secondary market transactions EXCEPT

Accepted Answer

A)  GE sells $30 million of new preferred stock. 
B)  Microsoft sells $2 million of IBM preferred stock out of its marketable securities portfolio. 
C)  The Magellan Fund buys $100 million of Apple previously issued bonds. 
D)  Allstate Insurance Co. sells $5 million in IBM bonds. 
A)  GE sells $30 million of new preferred stock. 
B)  Microsoft sells $2 million of IBM preferred stock out of its marketable securities portfolio. 
C)  The Magellan Fund buys $100 million of Apple previously issued bonds. 
D)  Allstate Insurance Co. sells $5 million in IBM bonds.

Question 19

You are considering an investment in 30-year bonds issued by Moore Corporation.The bonds have no special covenants.The Wall Street Journal reports that one-year T-bills are currently earning 3.55 percent.Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate = 2.75 percent
Default risk premium = 1.05 percent
Liquidity risk premium = 0.50 percent
Maturity risk premium = 1.85 percent
What is the fair interest rate on Moore Corporation 30-year bonds?

Accepted Answer

A)  3.80 percent 
B)  6.45 percent 
C)  6.95 percent 
D)  9.70 percent 
A)  3.80 percent 
B)  6.45 percent 
C)  6.95 percent 
D)  9.70 percent

Question 20

Suppose that the current one-year rate (one-year spot rate)and expected one-year T-bill rates over the following three years (i.e.,years 2,3,and 4,respectively)are as follows: 1R1 = 5 percent,
E(2r1)= 6 percent,
E(3r1)= 7.5 percent
E(4r1)= 6.85 percent
Using the unbiased expectations theory,calculate the current (long-term)rates for one-,two-,three-,and four-year-maturity Treasury securities.

Accepted Answer

A)  5.00 percent, 5.50 percent, 6.16 percent, 6.33 percent 
B)  5.00 percent, 5.25 percent, 6.10 percent, 6.27 percent 
C)  5.00 percent, 5.50 percent, 6.10 percent, 6.23 percent 
D)  5.00 percent, 5.25 percent, 6.16 percent, 6.49 percent 
A)  5.00 percent, 5.50 percent, 6.16 percent, 6.33 percent 
B)  5.00 percent, 5.25 percent, 6.10 percent, 6.27 percent 
C)  5.00 percent, 5.50 percent, 6.10 percent, 6.23 percent 
D)  5.00 percent, 5.25 percent, 6.16 percent, 6.49 percent

Which of the following statements is correct?

In 20XX,the 10-year Treasury rate was 4.5 percent while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0 percent.What is the average default risk premium on Aaa corporate bonds?

All of the following are types of financial institutions EXCEPT

When monetary policy objectives are to contract the economic growth,which of the following occurs?

In the United States,which of these financial institutions arrange most primary market transactions for businesses?

Suppose we observe the following rates: ₁R₁ = 13 percent,₁R₂ = 16 percent,and E(₂r₁)= 10 percent.If the liquidity premium theory of the term structure of interest rates holds,what is the liquidity premium for year 2,L₂?

A two-year Treasury security currently earns 5.13 percent.Over the next two years,the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year.Calculate the maturity risk premium on the two-year Treasury security.

Based on economists' forecasts and analysis,one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: Using the liquidity premium theory,what is the current rate on a four-year Treasury security?

One-year Treasury bills currently earn 3.75 percent.You expect that one year from now,one-year Treasury bill rates will increase to 4.15 percent.If the unbiased expectations theory is correct,what should the current rate be on two-year Treasury securities?

Suppose we observe the following rates: ₁R₁ = 8 percent,₁R₂ = 10 percent,and E(₂r₁)= 8 percent.If the liquidity premium theory of the term structure of interest rates holds,what is the liquidity premium for year 2,L₂?

Which of these money market instruments are short-term funds transferred between financial institutions,usually for no more than one day?

All of the following are secondary market transactions EXCEPT

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters

Exam 6: Understanding Financial Markets and Institutions

Which of the following statements is correct?

The Wall Street Journal reports that the rate on four-year Treasury securities is 4.75 percent and the rate on five-year Treasury securities is 5.95 percent.According to the unbiased expectations hypotheses,what does the market expect the one-year Treasury rate to be four years from today,E(5r1)?

In 20XX,the 10-year Treasury rate was 4.5 percent while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0 percent.What is the average default risk premium on Aaa corporate bonds?

All of the following are types of financial institutions EXCEPT

When monetary policy objectives are to contract the economic growth,which of the following occurs?

In the United States,which of these financial institutions arrange most primary market transactions for businesses?

Suppose we observe the following rates: 1R1 = 13 percent,1R2 = 16 percent,and E(2r1)= 10 percent.If the liquidity premium theory of the term structure of interest rates holds,what is the liquidity premium for year 2,L2?

A two-year Treasury security currently earns 5.13 percent.Over the next two years,the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year.Calculate the maturity risk premium on the two-year Treasury security.

Based on economists' forecasts and analysis,one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: Using the liquidity premium theory,what is the current rate on a four-year Treasury security?

One-year Treasury bills currently earn 3.75 percent.You expect that one year from now,one-year Treasury bill rates will increase to 4.15 percent.If the unbiased expectations theory is correct,what should the current rate be on two-year Treasury securities?

Suppose we observe the following rates: 1R1 = 8 percent,1R2 = 10 percent,and E(2r1)= 8 percent.If the liquidity premium theory of the term structure of interest rates holds,what is the liquidity premium for year 2,L2?

Which of these money market instruments are short-term funds transferred between financial institutions,usually for no more than one day?

All of the following are secondary market transactions EXCEPT

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters

Suppose we observe the following rates: ₁R₁ = 13 percent,₁R₂ = 16 percent,and E(₂r₁)= 10 percent.If the liquidity premium theory of the term structure of interest rates holds,what is the liquidity premium for year 2,L₂?

Suppose we observe the following rates: ₁R₁ = 8 percent,₁R₂ = 10 percent,and E(₂r₁)= 8 percent.If the liquidity premium theory of the term structure of interest rates holds,what is the liquidity premium for year 2,L₂?